The Federal Reserve painted a picture of a generally stable financial system, but one bubbling with risk-taking that merits attention.
The market volatility that arose from trades of GameStop’s stock was among the instances of instability flagged by the Federal Reserve in its semiannual report on Thursday.
The Federal Reserve warned about financial stability risks emanating from frothy stocks and debt-laden hedge fund bets in its twice-annual report on potential vulnerabilities in the system, pointing to the rise of so-called meme stocks as one sign that risk-taking could be getting out of hand.
The central bank’s Financial Stability Report, released Thursday, followed an unusual six months for markets. Over that period, stocks climbed steadily as the U.S. economic outlook rebounded, and stories of excess began to crop up.
Internet discussion boards helped fuel interest in stocks such as GameStop, a cryptocurrency created as a joke has run up in value, and a little-known hedge fund melted down, stories that have captured headlines and caused many — including, evidently, some at the Fed — to ask whether the financial system was headed for problems.
“Vulnerabilities associated with elevated risk appetite are rising,” Lael Brainard, a Fed governor, said in a statement accompanying the Fed’s release. Stock prices are high compared with earnings, and “the appetite for risk has increased broadly, as the ‘meme stock’ episode demonstrated.”
